Double Tax Avoidance Agreement (DTAA) or commonly known as a tax treaty is an agreement that is entered in between two countries for the purpose of preventing double taxation of income.
It is very often the case that non-resident Indians (NRI) who live abroad also earn some income from sources in India. This income may include salaries from temporary employment in India or income from investments in stocks traded on Indian stock exchanges etc. In such cases, the income earned in India, attracts tax in India as well as in the country of the NRI is a residence (this is usually because, India follows a source based taxation policy, as per which when some income is derived from India, India reserves its right to tax such income). However, to avoid such double incidence of tax, relief under the DTAA can be availed.
How to take benefit of DTAA?
Non- resident Indians residing in any of the countries with which India has entered into DTAA can avail of tax benefits provided under DTAA by arranging the following documents:
- Tax residency certificate:
The Tax Residency Certificate (TRC) can be obtained from the Government (tax authority) of the country in which the NRI resides. Details like name, legal status (individual, company, firm etc), address, nationality, country, tax identification number of the person in respective country, tax status, period for which the tax certificate is issued, all should be mentioned in the TRC.
- Self-declaration cum-indemnity form:
This form is to be submitted in the format prescribed by the particular bank.
- Other documents
NRI is required to submit a self-attested copy of PAN card and a self-attested copy of his passport and visa. If the passport has been renewed during the financial year, a copy of Person of Indian Origin (PIO) card will also have to be submitted.
The documents listed above must be furnished on an annual basis for claiming DTAA tax benefits each year.
Indian law also mandates tax withholding at the time of making any payment to non-residents. Hence, the abovementioned documents must be produced to the payer in India to ensure that the tax withholding happens after due consideration to the benefits provided in the DTAA. If TRC is not submitted to the deductor, the deductor may deduct tax on deposits at the presently applicable rate of 30.9% instead of the lower rate as mentioned in the DTAA.
- Types of income for which benefit under DTAA is usually availed:
Following incomes are typically covered in DTAAs on which relief is provided for double taxation:
- Services provided in India
- Royalty earned in India
- Salary earned in India due to employment rendered in India
- House property located in India
- Capital gains on transfer of assets in India
- Interest income earned in India
How can you claim the benefits of the DTAA?
The benefit of DTAA is provided by following two methods:
- Tax credit: Under this method you can claim a credit of tax paid in India against the tax payable in the foreign resident country.
- Exemption: Under this method, if the DTAA provides that the nature of income is such that it should be taxable only in the country in which the person is a resident, such income will not be subject to tax in India.